Osborn v. Commissioner

CHASE S. OSBORN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Osborn v. Commissioner

Docket No. 21856.

United States Board of Tax Appeals

22 B.T.A. 935; 1931 BTA LEXIS 2037;

March 30, 1931, Promulgated

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1. Where petitioner and several others joined together in a group to buy and sell certain property in a joint venture, each contributing services or capital, petitioner is taxable only on his share of the profits.

2. Where petitioner assigned certain relatives shares in the profits belonging to him to be obtained from the purchase and sale of shares in a corporation or its assets, but such assignment did not carry with it ownership of the shares of stock in such corporation, the amounts of gains realized from the liquidation of the proceeds of the sale of the assets of such corporation are taxable to petitioner.

3. Amounts paid to petitioner in the taxable years by the trustee of the joint venture, after the trustee had paid all costs incurred in purchasing the property and all expenses connected therewith, were income to petitioner and taxable to him and there has been no overpayment of his tax in either of the taxable years.

Raymond H. Berry, Esq., and Roberts P. Hudson, Esq., for the petitioner.

Elden McFarland Esq., and Arthur Clark, Esq., for the respondent.

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BLACK

Petitioner seeks redetermination of deficiencies in income taxes of $57,586.83 for 1920; $202,885.40 for 1921; and $168,171.10 for 1922, making a total of $428,643.33.

The alleged deficiencies arise out of transactions involving the purchase of the stock of the Michigan Iron & Land Company, Ltd., and the sale of its assets to the Michigan Iron, Land & Lumber Company, subsidiary of the Ford Motor Company, and the subsequent distribution of the proceeds arising from the sale of these assets. The entire profits arising from this transaction have been determined taxable against petitioner. Errors complained of by petitioner will be fully stated in the opinion.

FINDINGS OF FACT.

The petitioner has been a resident of Michigan for more than fifty years and has been active in business and public service. His business experience has been wide and varied, including the ownership and editorship of newspapers and the study, discovery, mining, and marketing of ironbearing and timber lands, both in the United States and the Dominion of Canada.

During the calendar years 1920, 1921, and 1922 involved herein one Roberts P. Hudson, trustee, owned as trustee substantially all the stock of the Michigan Iron & Land Company. TheMichigan Iron & Land Company sold its assets, and during the years in question distributed from the sale of these assets to the trustee, as stockholder, certain sums of money. From these sums of money received by the said trustee, he distributed to the petitioner in 1920 the sum of $100,000; in 1921 the sum of $75,000; in 1922 the sum of $100,000. These sums were included by the petitioner in his income tax returns as income for the several years in question and a tax thereon was paid. The balance of the moneys received by the said trustee was paid to creditors in satisfaction of liabilities incurred as expenses in connection with the sale of the property, or wqs distributed to certain other beneficiaries who had been designated under a so-called declaration of trust. No part of the said sums received by the trustee, other than the sums set forth above, was ever paid to, or received by, the petitioner. The facts and circumstances connected with this transaction were substantially as follows:

Prior to the taxable years, the Michigan Iron & Land Company, Ltd., was a partnership association under the laws of Michigan, having been organized in 1901, and was the owner of large tracts of iron and timber lands on the Upper Peninsula of Michigan. Several iron mines had been opened and were being operated and large timber operations had been conducted, and the property was considered of great value by petitioner and others. The controlling interest in this company was owned by Lord Brassey and associates, of England, who had decided to sell out at a low price. One Charles Will Wright was associated with Lord Brassey and his associates in mining in Sardinia and Italy, and while on a visit to this country in August, 1919, advised George A. Osborn, son of petitioner, that the Brassey stock was for sale and could be bought cheap. These two immediately consulted petitioner, seeking his aid and advice as to the wisdom of purchasing the Brassey stock, and ultimately the entire stock or property of the limited partnership for the purpose of resale. Petitioner's personal attorney, Roberts P. Hudson, was summoned and it was agreed that these four, viz., Wright, George A. Osborn, Hudson, and petitioner, should form a joint venture and purchase the stock of the Michigan Iron & Land Company, Ltd., and divide the profits from a sale equally. It was further agreed that petitioner, Chase S. Osborn, should be the directing head of this joint venture.

In canvassing the possible purchasers and contacts with purchasers, the original four, in order to get a better working organization, create greater number of contacts, and relieve others actively engaged in the matter, took into joint venture as participants, Mary F. Hadrich, who had been for many years private secretary to petitioner and in charge of his business records; Lillian J. Osborn, wife of petitioner; Emily O. Sanderson and Ethel O. Ferguson, daughters of petitioner; and Chase S. Osborn, Jr., son of petitioner. This occurred in the fall of 1919. The relative interests of all of these participants in the joint venture were all definitely fixed by oral agreement before the close of 1919.

The duties of the various members of the group were assigned and may be summarized as follows: Wright was to go to Europe to obtain an option on the Brassey stock; George Osborn, who was an engineer, was to assemble data and valuation of the property, to obtain options in stock from stockholders residing in the United States and elsewhere, and such other duties to assist in completing the deal as were necessary; Roberts P. Hudson was to take care of all legal work connected with the enterprise; Mary F. Hadrich was to look after correspondence and necessary clerical details; and Emily O. Sanderson and Ethel O. Ferguson were to attempt to find purchasers from business enterprises with which their husbands had contact. Richard Sanderson, husband of Emily O. Sanderson, was a vice president of the Baldwin Locomotive Company; and A. E. Ferguson, husband of Ethel O. Ferguson, was general agent of Oldsmobile Automobile Company. Lillian J. Osborn took no active part, except to take part in discussions and advise and counsel in the meetings held by those interested in the joint venture as to what was to be done toward putting the deal through. Chase S. Osborn, Jr., was partner with his brother, George A. Osborn, in all business transactions and looked after their partnership interests, including the management and operation of two newspapers while George A. Osborn was away engaged in work connected with the acquiring of the stock of the Michigan Iron & Land Company, Ltd. It was understood and agreed that he and George A. Osborn would share equally in whatever profits were attributable to their share in the joint venture.

The various members of the group immediately set about the duties assigned them with the result that by June 5, 1920, of the following year, options on all of the stock of the Michigan Iron & Land Company, Ltd., were secured, and purchase had been completed except for six shares. The stock which was acquired outside the shares owned by Lord Brassey was widely scattered and required several months to acquire and assemble.

Because Roberts P. Hudson was the attorney in and for the group and for several months was active in procuring options for the purchase of these shares, the contracts and options were taken in his name, and when the shares were finally purchased and transferred on the books of the company, they were reissued in his name, except a few qualifying shares for persons who were to serve as directors. After he had procured a substantial quantity of options to purchase these shares, but prior to the actual date of purchase, along about the first of May, 1920, Roberts P. Hudson became apprehensive of the fact that all these contracts were held in his name, and in case of his death there was nothing to show the interests of the respective parties in the joint venture. For this reason, Hudson drew up a so-called declaration of trust, evidencing his trusteeship of the property of which the joint venture was the owner, and in which the respective interests of the parties were set out. On account of the fact that Chase S. Osborn was the directing head of the enterprise, he signed the declaration of trust, which in words and figures was as follows:

For and in consideration of the sum of One ($1.00) Dollar to me in hand paid, and in consideration of the various services, forbearances, and other valuable consideration, on the part of the several persons hereinafter named and for the purpose of remunerating them in and about the purchase, reorganization and final distribution of the proceeds of the sale of certain property and assets known generally as the Michigan Iron and Land Company, Limited, a Michigan Co-partnership Association, Limited, I hereby sell, assign, and convey to my trustee hereinafter named the certain property, assets and proceeds arising from the purchase, reorganization and sale of the stock, property and assets of the Michigan Iron & Land Company, Limited, to the end that he or they may more expeditiously complete the organization and collect and distribute the proceeds or the assets and property of the said Michigan Iron & Land Company, Limited, or a corporation to be reorganized therefrom under the laws and statutes of Michigan. This trust is for the following purposes, only, to wit:

FIRST. That my said trustee shall pay such sum or sums as may be required for the purchase of the stock of the Michigan Iron & Land Company, Limited, now being purchased and assembled.

SECOND. And pay the proper and necessary expenses incident to such purchase to settle certain demands now accrued against the said reorganization, to-wit, a certain claim of one John M. Longyear in the sum of Sixty-five Hundred ($6500.00) Dollars or thereabouts.

THIRD. To pay from time to time as I shall hereafter direct to the respective persons hereinafter named the several sums set after their names, to-wit:

Charles W. Wright	$250,000.00 (Stock)
George A. Osborn	100,000.00 (Stock)
Chase S. Osborn, Jr	100,000.00 (Stock)
Lillian G. Osborn	100,000.00 (Stock)
Roberts P. Hudson	100,000.00 (Stock)
E. G. Kingsford	75,000.00 (Expense)
Emily O. Sanderson	60,000.00 (Stock)
Ethel O. Ferguson	60,000.00 (Stock)
M. F. Hadrich	60,000.00 (Stock)
Otto C. Davidson	60,000.00 (Expense)
Fred A. Maynard	60,000.00 (Expense)
Adelia Jones Carney	10,000.00 (Stock)
Marie I. Jones	10,000.00 (Stock)
Albert B. Davidson	10,000.00 (Expense)
Emma Jones Hogan	10,000.00 (Stock)
Georgiana Brown	10,000.00 (Stock)
Charles R. Osborn	10,000.00 (Stock)
Stephen P. Osborn	10,000.00 (Stock)
Eugene B. Osborn	10,000.00 (Stock)
Emma O. Reed	10,000.00 (Stock)
Fred S. Case	5,000.00 (Expense)
Merlin Wiley	5,000.00 (Expense)
Thomas J. Green	5,000.00 (Expense)
Henry A. Montgomery	5,000.00 (Expense)

FOURTH. The balance of the proceeds of such assemblement and sale is to be paid to Chase S. Osborn.

FIFTH. The items herein assigned to Albert B. Davidson and Fred S. Case are to be considered as a part of the expense of the purchase, assemblement, reorganization and sale of the said property.

It is further understood as an essential part of the trust hereby created that the direction and control of the respective payments shall be and continue subject to my direction and that said trustee shall from time to time as I may direct make such distribution either in whole or in part and render to me from time to time a full statement of his doings and transactions in and about said assemblement, purchase, reorganization and sale.

The trustee herein named is Roberts P. Hudson.

In executing this trust I hereby recognize the right and claim of the several persons named therein to the amounts set after their respective names.

This instrument was signed by Chase S. Osborn, May 15, 1920.

Prior to the execution of this declaration of trust there had been discussed a division of profits to the following relatives of petitioner and his wife, Lillian J. Osborn, viz., Adelia J. Carney, Marie I. Jones, Emma Jones Hogan, Georgiana Brown, Charles R. Osborn, Stephen P. Osborn, Eugene B. Osborn, and Emma O. Reed, and the share which each was to receive had been determined. None of these were present at any of the conferences at which plans were laid for the purchase and sale of the property in question. They did not perform any duties or contribute either services or money to the enterprise. They were included in the designation of trust as parties in interest, through the generosity of Chase S. Osborn, Sr.

The declaration of trust set out above sets forth the relative interests of the several joint ventures exactly as they had been determined in the latter part of 1919. The interests of the several parties mentioned therein were determined after consultation and agreement with each other and Chase S. Osborn, Sr., except the eight relatives of Chase S. Osborn, Sr., and his wife mentioned above, whose interests were determined after consultation by Chase S. Osborn and his wife, Lillian J. Osborn. The interests of those to share in the profits was evidenced by the word "(stock)" written after his or her name. No stock in the corporation was ever issued to any of these parties. All of the stock of the corporation, except a few qualifying shares, was issued to Roberts P. Hudson, trustee. This instrument, in addition to setting forth the respective interests of the parties, also provided for the payment of certain sums to other individuals in consideration for services which had been or were to be performed, for the joint venture. These individuals were distinguished from those who were to receive profits by the insertion of the word "(expense)" after the name of each individual who was thus designated.

During the first half of the year 1920 those active in the joint venture directed their efforts first toward the acquisition of control of the Michigan Iron & Land Company, Ltd., and, second, toward procuring a contract for the sale of the shares thus acquired or the sale of the physical assets back of them. At the same time they were considering the formation of separate entities for the purpose of operating the properties. By acting through third parties, the venturers interested the Henry Ford interests in the property. These interests were finally induced to put up, first, $250,000, and later, $1,000,000, as a loan against the purchase of the shares of the Michigan Iron & Land Company, Ltd. The loan was made to the joint venturers personally. While the joint venture or syndicate continued to function, title to all shares acquired remained in the name of Roberts P. Hudson, as trustee.

The members of the joint venture, or syndicate, were not required to contribute toward the purchase of these shares as it was possible to use the money advanced by the Ford interests for that purpose, the Ford interests being willing to treat the said advances as partial payment on account of the properties, when, as, and if the properties were sold to the Ford interests. If the sale failed to be completed, the money loaned would have to be returned to the Ford interests. By agreement of the parties, the partnership association, the Michigan Iron & Land Company, Ltd., was reorganized under an authorizing statute of the State of Michigan into a corporation, the name of which was the "Michigan Iron & Land Company." This reorganization was effected in July, 1920. The 26,000 shares in the Michigan Iron & Land Company, Ltd. (a partnership association), of the par value of $1 each, were exchanged for $2,600 shares in the Michigan Iron & Land Company (a Michigan corporation), of the par value of $10 per share, on the basis of ten shares for one share. Thereupon, substantially all of the stock of the corporation was owned by Roberts P. Hudson, trustee, for the syndicate or joint venture.

Thereafter, on October 25, 1920, the new corporation, Michigan Iron & Land Company, sold and conveyed all of its assets to the Michigan Iron Land & Lumber Company, a Ford organization, treating the sum of $1,250,000 advanced by the Ford interests to the syndicate as a payment on account for the total purchase price of $2,700,000. The balance was paid to the Michigan Iron & Land Company in installments as follows:

January 20, 1921	$291,775.02
July 1, 1921	100,000.00
October 1, 1921	400,000.00
February 1, 1922	400,000.00
July 3, 1922	250,000.00

The payment of $291,775.02 made January 20, 1921, was a payment of $300,000 made before it was due and was discounted accordingly.

The contract of sale reads as follows:

MEMORANDUM OF AGREEMENT made this 25 day of October, 1920, between Fred S. Case, a party of the first part, Henry Ford, party of the second part, Michigan Iron & Land Company, party of the third part, and Michigan Iron, Land & Lamber Company, party of the fourth part, and the Ford Motor Company as consenting party hereto, in modification and amplification of a certain agreement under date of March 30, 1930, between the parties of the first and second part hereto,

WITNESSETH THAT,

WHEREAS, first party to this agreement and to said contract of March 30, 1920, has completed the purchase of all (except six shares) of the stock of the Michigan Iron & Land Company, Ltd., and the Michigan Iron & Land Company, Ltd., has organized under the Michigan statutes as a corporation, and is ready to deliver deeds of conveyance to the lands and property of the Michigan Iron & Land Company in compliance with the terms of said contract of March 30, 1920, and

WHEREAS, a company known as Michigan Iron, Land & Lumber Company has been organized for the purpose of taking over the property and assets of Michigan Iron & Land Company, and for sundry other purposes, and it is desirable that the property and assets of Michigan Iron & Land Company be conveyed direct to said Michigan Iron, Land & Lumber Company, and that the terms of payment in said contract of March 30th, 1920, be modified, and

WHEREAS, the Ford Motor Company holds a financial interest in the Michigan Iron, Land & Lumber Company.

THEREFORE, in consideration of the various convenants herein provided to be performed, it is hereby agreed:

1. That the party of the first part hereto, and to said agreement, hereby assigns all his right, title and interest in and to said agreement of March 30, 1920, to the Michigan Iron & Land Company.

2. That the party of the second part hereto, and to said agreement of March 30, 1920, (Henry Ford), hereby assigns to the Michigan Iron, Land & Lumber Company all his right, title and interest in and to said agreement of March 30, 1920, and directs that the various conveyances of the lands of the Michigan Iron & Land Company be executed in favor of, and delivered to the Michigan Iron, Land & Lumber Company in lieu and stead of himself.

3. The party of the fourth part, Michigan Iron, Land & Lumber Company, hereby accepts the title to said lands and agrees to pay the balance of the purchase price, and that the payment of the several installments herein provided to be paid shall be a first lien upon the property and assets of the said Michigan Iron & Land and Lumber Company.

4. The party of the first part agrees to accept payment in lieu of the cash balance as provided in said contract of March 30, 1920, installment payments as follows:

* * * (here is set out the payments as they were to be made) * * *.

Fred S. Case, mentioned in the foregoing instrument, was acting as representative for the joint venture. The deed of conveyance to its lands and property from the Michigan Iron & Land Company to the Michigan Iron, Land & Lumber Company was thereafter made in 1920 at a date not shown in the record.

During the years in question, namely 1920 to 1922, inclusive, the Michigan Iron & Land Company paid to Roberts P. Hudson from the sale of its assets on account of the stock owned by him as trustee, and he in turn distributed to those claimed to be members of the joint venture, the following sums: 1920, $188,000; 1921, $380,000; 1922, $379,500.

Payments to persons whom petitioner contends were members of the joint venture were as follows:

	1920	1921	1922
Charles Will Wright		$100,000	$75,000
George A. Osborn	$5,000	20,000	30,000
Roberts P. Hudson	33,000	30,000	29,500
Mary F. Hadrich	10,000	30,000	10,000
Lillian J. Osborn	20,000	30,000	25,000
Emily O. Sanderson	5,000	25,000	20,000
Ethel O. Ferguson	5,000	25,000	20,000
Chase S. Osborn, Jr	5,000	10,000	30,000
Chase S. Osborn, Sr	100,000	75,000	100,000
Adelia Jones Carney		5,000	5,000
Marie I. Jones		$5,000	$5,000
Emma Jones Hogan		5,000	5,000
Georgiana Brown	$5,000	5,000
Charles R. Osborn		5,000	5,000
Stephen P. Osborn		5,000	5,000
Eugene B. Osborn			10,000
Emma O. Reed		5,000	5,000
	188,000	380,000	379,500

Some of the money received by the corporation in the sale of its assets has not yet been disbursed, because of the contention made by the Government concerning taxes.

The joint venture, or the trustee acting on behalf of the joint venture, paid for the shares of stock of the Michigan Iron & Land Company, Ltd. (the partnership association), the sum of $958,740, and in addition to such capital expenditures paid such other expenses as were incurred in and about the purchase of the shares.

The following is a tabulation of the disbursements in connection with the purchase of the shares of the Michigan Iron & Land Company, Ltd., and the sale of the assets of the Michigan Iron & Land Company. These are listed together in view of the fact that we consider it is immaterial to the tax liability in the instant case whether they constituted expenses of the new corporation, expenses of the syndicate, or expenses of the taxpayer in connection with the transaction:

Stock purchased		$958,740.00
Commissions and fees paid (including items of compensation paid of $60,000, each, to E. G. Kingsford and Otto C. Davidson, and $5,000 to Fred S. Case)		148,296.20
Cost of abstracts		6,561.75
Telephone, telegraph, cablegrams		219.85
Audit and tax service:
Detroit Trust Company	$651.62
Schneider, Lynch & Walters	339.41
		991.03
Travel expenses		1,635.47
Detroit Trust Company fees		16,500.00
Internal revenue stamps		2,487.50
Michigan franchise tax		12,887.45
Federal capital-stock tax		11,116.75
Legal and other expenses:
Davidson & Hudson	10,756.46
F. A. Maynard	60,330.00
Albert B. Davidson	10,000.00
Merlin Wiley	5,000.00
Thomas J. Green	5,000.00
Roberts P. Hudson	7,400.00
		98,486.46
R. S. Archibald, claim		12,500.00
		1,270,422.46

All of the foregoing items represent either cost of the stock of the Michigan Iron & Land Company, Ltd., expenses incident to the acquisition of same, and/or expenses in connection with the sale of the assets of the Michigan Iron & Land Company.

These expense liabilities were incurred by virtue of contractual obligations or agreements to pay, and were reasonable and necessary to the completion of the deal.

Respondent in the deficiency notice stated now and why he determined the deficiencies against the petitioner in the following language:

In the original examination income for stockholders and beneficiaries of the Michigan Iron and Land Company was considered to be taxable to the trustees. It is noted in the article of declaration establishing the so-called trust, that you reserved control and supervision whereby payments were to be made as directed by you. In view of the wording of the so-called trust declaration, it is held by this office that merely an agency was created to carry out the liquidation, and therefore, no trust existed for income tax purposes. A reexamination has, therefore, been made in which the liquidating dividends are included in your individual returns and taxed accordingly. In brief dated October 26, 1925, filed by Mr. Hudson as trustee, it is noted payments to certain individuals were claimed to be compensation for services in bringing about sales of the assets to Mr. Ford. Deductions amounting to $34,500.00 for 1920, $65,000.00 for each of the years 1921 and 1922 have been allowed in determining the total income for the respective years.

1920.

The amount of $227,500.00 liquidating dividends decreased by $34,500.00 expenses leaves $193,000.00 subject to tax and since $100,000.00 was reported in the return, the total net income of $101,670.77 shown in the prior audit is increased by $93,000.00 to $194,670.77. The tax liability is $89,367.34, and since a total of $31,780.51 tax was assessed, there is a deficiency of $57,586.83.

1921.

The amount of $460,000.00, liquidating dividends, decreased by $65,000.00, expenses, leaves $395,000.00 subject to tax, and since the amount of $74,879.00 was reported in the return, the total net income is increased by $320,121.00. Inasmuch as the income has been increased, the total amount of charitable contributions made is allowable as a deduction, making a decrease in the income of $7,516.91. These adjustments result in a total net income of $376,037.28 and tax liability of $214,826.92. As $11,941.52 tax was assessed, there is a deficiency in tax of $202,885.40.

1922.

The amount of $474,500.00 liquidating dividends, less $65,000.00 expenses, leaves $409,500.00 subject to tax and since $114,980.00 was reported in the return, the total net income is increased by $294,520.00.

These adjustments result in a total net income of $410,131.79 and tax liability of $208,198.70. As $40,027.60 tax was assessed there is a deficiency in tax of $168,171.10.

OPINION.

BLACK: Petitioner makes the following contentions as to why all the profits arising from the sale of the assets of the Michigan Iron & Land Company to the Michigan Iron, Land & Lumber Company, a subsidiary of the Ford Motor Company, and the liquidation of the proceeds of such sale, should not be held taxable to him:

(1) The status and interests of the syndicate members were definitely fixed by agreement and the petitioner had no control over payments or distributions during the periods in question.

(2) The trust instrument did not change the relative interests of the syndicate members or give the petitioner the right to more than his residual share.

(3) The petitioner's residual share could not be increased by refusal to pay contractual expenses of the syndicate.

(4) Payments made to the petitioner during the period in question were not profit and payments of income tax based thereon constitute overpayments of tax.

(5) No profit accrued to members of joint venture until after sale of corporate assets, October 25, 1920.

Respondent's contentions are shown in the quotations from the deficiency notice which were have embodied in our findings of fact.

A great amount of testimony has been taken in this case and the record is a large one, but in its final analysis it resolves itself into the question whether the petitioner was the sole owner of the stock of the Michigan Iron & Land Company, successor to Michigan Iron & Land Company, Ltd., a limited partnership, and entitled to all the profit from the sale and liquidation of the proceeds of its assets, or was merely a member of a group, syndicate, or joint venture and only entitled to his residual share of the profits, after certain agreed amounts had been paid to others. Considerable argument is devoted by counsel on both sides as to the nature of a joint venture and as to whether one existed in this case, it being contended by petitioner that there was one, while respondent claims that the entire deal belonged to petitioner and that the profits are taxable to him alone.

A joint venture is defined as: "An association of two or more persons to carry out a single business enterprise for profit." Fletcher v. Fletcher,206 Mich. 153">206 Mich. 153; 172 N.W. 440">172 N.W. 440; Alderton v. Williams,139 Mich. 296">139 Mich. 296; 102 N.W. 753">102 N.W. 753.

"While under the present state of the law courts do not treat a joint venture in all respects identical with a partnership, the contractual relations of the parties and the nature of their association are so similar and closely akin to a partnership that it is commonly held that their rights and liabilities are to be tested by the same rules that govern partnerships." Keismetter v. Rubenstein,235 Mich. 35">235 Mich. 35; 209 N.W. 154">209 N.W. 154, at page 157.

"The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services and having a community of interest in the profits." Word v. Thompson,22 How. 330">22 How. 330, 334; 16 L. Ed. 249">16 L.Ed. 249; Meehan v. Valentine,145 U.S. 611">145 U.S. 611; 12 Sup.Ct. 972; 36 L. Ed. 835">36 L.Ed. 835; Keismetter v. Rubenstein, supra, at page 157.

Upon the facts fully detailed in our findings of fact herein, we are of the opinion that originally Charles Will Wright, George A. Osborn, Roberts P. Hudson, and Chase S. Osborn, petitioner, agreed to constitute a joint venture to acquire the stock of the Michigan Iron & Land Company, Ltd., for the purpose of reselling said stock or the assets of said limited partnership and liquidating the proceeds and sharing the profits arising therefrom equally. Subsequently, Lillian J. Osborn, Mary F. Hadrich, Emily O. Sanderson, Ethel O. Ferguson, and Chase S. Osborn, Jr., were taken in as members of the joint venture and a new agreement was made concerning the sharing of profits from it. This agreement was made in 1919 while negotiations were still under way to acquire the stock of the limited partnership, and before any of such stock had been acquired. It was made prior to the entering into of any contracts or options for the sale of the stock or assets of the limited partnership by which the profits herein sought to be taxed were gained. The sharing of the profits thus agreed upon in this verbal understanding entered into in 1919 was the same as set out in the so-called declaration of trust, drawn up by Roberts P. Hudson in 1920 and signed by petitioner, Chase S. Osborn, May 15, 1920. These members of the group which we have enumerated above joined together to carry on a single venture for their common benefit, each contributing property to be used to defray expenses or services and having a community of interest in the profits. We hold that none of the profits arising from the transaction which were paid during the taxable year by the trustee to Charles Will Wright, George A. Osborn, Roberts P. Hudson, Lillian J. Osborn, Mary F. Hadrich, Emily O. Sanderson, Ethel O. Ferguson, and Chase Osborn, Jr., should be taxed to petitioner, Chase S. Osborn. It was not his income. M. J. Sullivan,2 B.T.A. 1012">2 B.T.A. 1012; Robert Jemison,3 B.T.A. 780">3 B.T.A. 780.

We do not think the evidence is sufficient to establish that Adelia Jones Carney, Marie I. Jones, Emma Jones Hogan, Georgiana Brown, Charles R. Osborn, Stephen P. Osborn, Eugene B. Osborn, and Emma O. Reed, were members of the joint venture. They contributed no capital and performed no services to accomplish the success of the joint venture. It is true there is some evidence in the record to the effect that they were to hold themselves in readiness to render service if called upon, but were not immediately designated any specific duties and never performed any. The evidence falls short of meeting the test of joint venturers, as defined by the courts and in prior decisions of this Board.

It is clear that they acquired their interests in the profits not through any efforts or capital which they contributed to the joint enterprise, but through the generosity of petitioner, Chase S. Osborn. The following questions and answers on this point at the hearing, are explanatory of the true situation, as we see it:

Q. Now as a matter of fact is this not the situation - we want to get the facts here - that you felt an obligation to take these people in, although they were not there really as partners in this enterprise, and to pay them such profit as might have accrued to the extent you have stated?

A. Not at all. It has been the policy of my life from the first penny I have earned to consider them as my partners and to give them a chance to do and help in order that they might not consider themselves mendicants, or to humiliate them, they were made a part of my life in many deals before this. This is maybe the twentieth or thirtieth; in other words, I have been the one who, perhaps, was gifted to make money, and they have done much work to help me in all the things I have achieved.

Q. You mean they gave you a moral stimulus? A. No, an actual physical assistance. Q. What physical assistance did Eugene Osborn give you?

A. He was twelve years older than I am, and he took care of me as a boy.

Q. I mean in regard to this particular deal?

A. If he had not taken care of me I would have been dead and could not have made this deal.

Q. That is rather in the nature - in the nature of a moral obligation?

A. No, that is the most serious obligation you have on earth. That makes him more serious as a partner.

Q. I realize you are getting down to fundamentals?

A. I do not blame the court or you for thinking it is an odd situation. It is odd, but I have always done this. I have always counted in everybody that ever contributed the weight of a hair to me. They have gotten into my heart to participate in any respect. They have been my partners of life.

The foregoing testimony mirrors a most praiseworthy attitude on the part of petitioner and doubtless we would have a much happier world in which to live if his generosity were more widely emulated, but in testing whether one is a member of a joint venture and entitled in his own right to part of the profits, we have to look to the usual tests of the law, and when we look to these tests, we are unable to hold that the eight persons whom we have named above were members of the joint enterprise. They received their interests as a gift and were not participants in their own right. Were these gifts completed and irrevocable before there was any accrual of profits in the joint venture to petitioner? If they were, then we do not think petitioner would be taxable on the part of the profits paid to the recipients of his bounty, even though such profits arose out of a gift of property from him. M. J. Sullivan, supra;Robert Jemison, supra;Frederick H. Hoffman,3 B.T.A. 964">3 B.T.A. 964.

Petitioner in his fifth assignment of error contends, "No profit accrued to members of joint venture until after sale of corporate assets October 25, 1920." Counsel for petitioner, in support of this assignment of error, argue in their brief as follows:

It is submitted that it was impossible for any profit to accrue to petitioner and his associates until the joint venture had culminated in an actual sale. It was not until after October 25, 1920, the date on which the sale occurred, that any profit of any kind or nature arose to petitioner and his associates.

By the terms of the contract of sale of October 25, 1920, it was agreed that the $1,250,000.00 hereinbefore referred to was to be treated as a credit toward the purchase price and that the balance due, namely $1,450,000.00, was to be paid in installments as set forth in the contract. It is submitted that these payments were made to theMichigan Iron and Land Company, the vendor under the contract of sale, that they did not constitute income to the joint venture, or any member thereof, until the Michigan Iron and Land Company began paying liquidating dividends. Payment to a corporation is not payment to its stockholders and profit accruing to a corporation is not profit to its stockholders unless and until same is distributed to the stockholders. It follows, as a matter of law, that the members of this joint venture did not derive any income or profit from the joint venture until it was paid them by the corporation in the form of liquidating dividends received through Roberts P. Hudson, trustee.

We think the foregoing contention is correct and if we could find that the eight above-named beneficiaries were the actual owners of stock in the Michigan Land & Lumber Company in their own right, even though they did receive it as a gift from petitioner, they would be entitled to their share of the liquidating dividends and the profits resulting from such liquidation would be taxable to them and not to the petitioner. But we hold that the interest set apart to them in the so-called declaration of trust of May 15, 1920, was simply a designation of the share of profits which they were to receive out of the residuary interest belonging to petitioner. Under such circumstances we think these payments made during the taxable years by Roberts P. Hudson, trustee, to Adelia Jones Carney, Marie I. Jones, Emma Jones Hogan, Georgiana Brown, Charles R. Osborn, Stephen P. Osborn, Eugene B. Osborne, and Emma O. Reed were made out of the share of profits which belonged to petitioner and were taxable to him. Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; Ella Daly King, Executrix,10 B.T.A. 698">10 B.T.A. 698; Charles C. Ruprecht,16 B.T.A. 919">16 B.T.A. 919.

In Ormsby McKnight Mitchel, supra, we said:

As between the parties to this agreement it may be legal and enforceable and the taxpayer may be trustee of one-half the income he receives from the partnership of which he is a member and compellable to account therefor, but this is of no materiality in considering the question before us. The income from taxpayer's interest in the partnership is first income to him, and no matter how he tries to dispose of it, or does dispose of it, it is taxable to him as income from his interest therein.

In Ella Daly King, Executrix, supra, we said:

We have heretofore held that a person's tax liability can not be lessened by a transfer of income already earned or expected to be earned. The very act of transfer is an exercise of enjoyment of the fruits of ownership of property and measures the transferor's ability to contribute to the cost of government.

In Charles C. Ruprecht, supra, we said:

We are satisfied that the petitioner's agreement with Gardner as to the equal division of profits arising from their joint undertakings was a legally enforceable one, and that he was entitled as a matter of law to one-half of the sum collected in 1921. The mere fact that he saw fit to surrender his rights to Gardner can not, in our opinion, defeat the rights of the Government to demand a tax from the petitioner upon his share of that payment. See Arthur C. Levering,5 B.T.A. 616">5 B.T.A. 616, in which we held that the share of profit from a joint venture was income to the venturer notwithstanding the fact it was transferred to another immediately upon its receipt.

This disposes of all petitioner's assignments of error except the fourth, in which he contends that "payments made to the petitioner during the period in question were not profit and payments of income tax based thereon constitute overpayments of tax." We think this contention is without merit. The $100,000 paid to petitioner in 1920 and the $75,000 paid to him in 1921 and the $100,000 paid to him in 1922, and by him returned as income for the respective years, were paid to him by Roberts P. Hudson, trustee, after the trustee had paid the full amount of the costs of acquiring the stock of the Michigan Iron & Land Company, Ltd., and after all expenses connected therewith had been paid. The amounts thus received by petitioner were profit and taxable income to him and there has been no overpayment of his tax.

Reviewed by the Board.

Decision will be entered under Rule 50.